Southern Missouri Bancorp, Inc. (SMBC) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the SMBC Quarterly Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chief Financial Officer, Matt Funke. Please go ahead.

Thank you, Phil. Good afternoon, everyone. This is Matt Funke, CFO of Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, April 24, 2017, and to take your questions. We may make certain forward-looking statements during today's call, and we refer you to our cautionary statement regarding those forward-looking statements contained in the press release. To start out, we want to review the preliminary results highlighted in the quarterly earnings release. The March quarter is the third quarter of our 2017 fiscal year. We earned $0.53 diluted in the March quarter. That's up $0.08 from the same quarter a year ago, and it's down $0.03 from the $0.56 diluted that we earned in the linked December quarter. The current period includes some nonrecurring benefits, which we'll touch on below. Asset growth slowed a bit during the March quarter, but loan growth was stronger. We had ended December with unusually high cash balance, and we showed asset growth of just $3.7 million, but loan growth was $16.3 million, which was just a little better than we did in the same quarter a year ago. Compared to March 31, 2016, gross loans were up $133 million. That's an increase of 12%. The investment portfolio was up slightly for the quarter and was up just over 4% for the last 12 months. Deposits were up more than $60 million in the March quarter and $150 million compared to last March. In this quarter, we used traditional brokered CD funding to the tune of $115 million, and public unit deposits accounted for $19.3 million. Part of that $19.3 million was because a larger public unit depositor migrated from our [indiscernible] repurchase agreement balances into a deposit account. The breakdown of total deposit growth was about 1/3 CD growth and 2/3 nonmaturity deposit growth for the quarter. Moving to the income statement. We try to update you each quarter on our fair value discount accretion on our loans and the smaller fair value premium amortization on time deposits that relates to our Peoples Bank acquisition, which is now approaching 3 years old. In the current quarter, that item decreased again to $216,000. You may remember that we had some higher accretion amounts in the June and September quarters of the 2016 calendar year. That resulted from the resolution of a particular purchased credit-impaired loan, then we saw a decline beginning in the December 2016 quarter. In the year-ago quarter, March 2016, we recognized accretion of $322,000. And in the linked quarter, December 2016, discount accretion was $267,000. We do continue to expect the impact of discount accretion in total to move lower in the coming quarters, but we could see isolated increases due to continued resolution of individual impaired credit. Net interest margin for the third quarter of the fiscal year was 3.64%. Of that, 6 basis points resulted from the fair value discount accretion we mentioned. In the year-ago period, margin was 3.72%, of which 10 basis points resulted from discount accretion. So on what we would look at as a core basis then, margin was down 4 basis points comparing this period to the year-ago period. Our core asset yield was down 6 basis points, and our core cost of funds was down 3 basis points. Compared to the linked quarter, when our net interest margin was 3.70% and we had 8 basis points of discount accretion benefit, this would indicate our core margin is down 4 basis points. But that decline is primarily based on how we annualize our figures. We generally take a simple multiplication of 4 by our quarterly results. And if we adjusted that for the 90 days this quarter versus 92 days last quarter, in the December quarter, we'd actually expect our margin to have improved a few basis points on both a reported and a core basis. The other side to that analysis is that we do have a few hundred million in scheduled-interest loans and most of our investment portfolio accruing scheduled interest, or 30 days interest each month, 30/360 basis. And those loans and those investments will perform better in a 90-day quarter versus a 92-day quarter. Also, when you look at this current period compared to the year-ago period, the decline in our margin is somewhat attributable to the leap year in the prior period. So as we view our margin, we're in a fairly stable to slightly improving base, even though the reported results wouldn't necessarily show that. Noninterest income as a percentage of average assets increased to 79 basis points as a percentage -- that's up 14 basis points compared to the same quarter a year ago. But we did note in the press release that we had almost $350,000 in nonrecurring benefits in the current quarter. That includes a BOLI benefit of just over $300,000 and then a smaller benefit from our sale of an interest in a low-income housing partnership. Outside of those items, noninterest income would have improved by 5 basis points compared to the year-ago period but it is a few basis points lower than where we've ran the last several quarters. However, for our March quarter, that's not too bad. We generally see a little more of a drop-off in NSF charges and secondary market loan sales this time of the year than what we did in the current period. Noninterest expense was up compared both to the same quarter a year ago and compared to the linked quarter. We had $73,000 in expenses attributable to M&A this quarter. We had just a little more than that in the linked quarter. As a percentage of average assets, noninterest expense increased to 2.58%. If you back out those M&A items, our intangible amortization and seasonal swings in our provision for off-balance sheet credit exposure, we would calculate that our operating noninterest expense as a percent of average assets is up 4 basis points compared to the year-ago quarter and up 16 basis points compared to the linked quarter. Compensation was the big driver in that increase over the linked quarter as we filled a few vacant positions. We added to our executive ranks. We processed our year-end compensation increases, and we absorbed an increase in our health insurance benefit. Occupancy remains stable from the linked quarter, but it is up year-over-year, as we've seen in the last several quarters. Back to the balance sheet and asset quality. Nonperforming loans are now $3.1 million. That is 25 basis points on our total loans and down -- that's down from 45 basis points at December 31. The decrease of almost $2.5 million is attributable to the restoration to accrual status of several purchased credit-impaired loans, which have performed according to terms for a reasonable period and for which our collateral analysis indicates we're in a good position to be assured of the collection of all principal and interest due, net of any purchase accounting adjustments. Nonperforming assets at March 31 were $6.5 million, declining in tandem with our NPLs, and they stand at our lowest level since before the Peoples acquisition, both in total dollars and as a percent of total assets, 44 basis points. We consider nonperforming assets to be our foreclosed and repossessed property, our nonaccrual loans and any loans 90 or more days past due. Net charge-offs for the quarter were 6 basis points annualized. That's consistent with our year-to-date level so far for this fiscal year. Last fiscal year, by comparison, we were at 9 basis points for the full year. The allowance as a percentage of our gross loans was 1.22% at March 31. That's unchanged from 12/31, been relatively stable over the previous 4 quarters. We provisioned $376,000 in the March quarter. That's down from the linked quarter and the year-ago period. As our analysis showed, we required less of an allowance due primarily to the reduction in NPLs. We noted in our press release that the effective tax rate was 27%, down more than 4 percentage points from 31.7% the same period of last year, and it's a little below the 27.8% for our full fiscal year-to-date. The bank's formation at the beginning of this fiscal year of a real estate investment trust has benefited our effective tax rate, and the inclusion in the current period of the tax-advantaged noninterest income item related to bank-owned life insurance contributed to the lower rate in the current period. That concludes my prepared remarks on the financials. And I'll introduce Greg Steffens, our CEO, to share his thoughts on our performance and update you on our strategic initiatives.

Thank you, Matt. We're pleased with our year-to-date growth of $90 million this year, right at 8%. At this time, we feel like it's likely that we will exceed our historical growth target of 8% to 10%. Loan growth at our ag lines have yet to draw to their fully extended levels, and we have a decent amount of loans in our pipeline at this point that will likely contribute slightly to growth. Our quarterly growth was $16 million, which is a little stronger than normal for the March quarter. And the components of our loan growth over the quarter were very similar to recent quarters and mostly consisted of non-owner-occupied CRE, and we did have a little growth in ag real estate operating lines and our residential rental properties, offset by a small reduction in our multifamily loans. If we look at the composition of our $90.5 million loan growth for the fiscal year-to-date, it is comprised primarily of multifamily growth of $11 million, nonresidential commercial real estate of $70 million and C&I of $13 million. Geographically, it was led primarily in Southwest Missouri, which was up $55 million, while our Arkansas region was up $26 million, and Southeast Missouri was up $11 million. Looking ahead, we foresee most of our growth coming from Southwest Missouri and, to a lesser extent, by our Arkansas markets. Southeast Missouri will remain slower than the other markets, but given our higher market penetration and lower growth rates in Southeast Missouri, we're pleased with the results in each of our regions. As far as giving an update on our ag portfolio, our ag balance has increased over the quarter to $67 million from $64.6 million on our operating lines at 12/31. Our farmers were able to get into their fields right at the first of the year to begin preplanting work to their ground and was able to draw some balances earlier than normal. However, those early advances have been offset now at this point as we've had higher rains, and we're waiting for a lot of the actual planting to occur. When we look at our balances this year, we hit our low balances in January instead of the typical March. We had forecast paydowns of approximately $10 million for the quarter, and in reality, we ended up a little over $2 million. Now nearly all of our ag lines have been renewed for the upcoming year, and the performance of our portfolio has met our expectations. We did have 2 small farm customers that we did close out over this last quarter, but there was no real overall impact to our credit quality. And our outlook for credit quality this upcoming year is slightly better than when we did our analysis last year. When we look at our overall expected ag draws over the upcoming quarter, we're projecting them to be in the neighborhood of $15 million. When we look at our ag -- our loan pipeline, it is up slightly from December to $43 million, but it's quite a bit lower than the $59 million of a year ago. Our pipeline should be sufficient to maintain loan balances outside of our ag draws and maybe contribute slightly to loan growth. We believe our loan pipeline has recently been negatively impacted by loan pricing as we've increased our loan pricing with some of the changes in the prime rate and recent Fed increases, while some of our competitors have not changed a corresponding amount. So at this point, we consider our loan pricing to be more competitive now than -- from our competitors than it was last quarter. We are pleased with the diversity of what we have coming down our pipeline at this time. Loan production for the quarter was $166 million compared to $140 million last quarter and $147 million in the year-ago quarter. And our year-to-date originations have totaled $456 million versus $376 million last year-to-date. So we feel like our loan production is good. When we look at our secondary market activity, our income is tracking at our budgeted levels, and we are now at $621,000 in income versus $399,000 for the same fiscal year-to-date last year. Origination volume is up. We do see a decline in -- a little bit of a decline in activity with the recent upticks in rates over the last 3 months. Year-to-date originations have been $35.5 million versus $23 million last year-to-date. Our loan-to-deposit ratio has declined slightly but remains slightly high at 98.7% as compared to 96.9% last year for the same quarter. We do anticipate this to rise slightly over the June quarter. When we look at our deposits, our deposits grew $61 million in the third quarter and $152 million for the fiscal year-to-date, and that already covers the brokered deposit growth for the quarter and year-to-date. We do remain focused on core deposit account growth, and our nonmaturity deposits are now up $96 million for the year or 13%. We are pleased with this level of growth, but we are hopeful that it will continue. Excluding public unit monies, our nonmaturity deposits are up $64 million or 10.5%, which compared to $47 million for the last year-to-date. So overall, we are exceeding our growth targets for our nonmaturity deposit growth. By region, our nonmaturity deposits are up in the East region by $12 million; in our West region, $22 million; in the South region, by $11 million. We are also pleased with our overall number of net new accounts as our net new accounts are up nearly 6% and have 2,047 nonmaturity accounts compared to 1,445 last year. As we turn to M&A, our Capaha transaction is proceeding as expected, and we have received Fed approval. And we are now waiting on approval from the Division of Finance for the State of Illinois and Missouri. We are hoping to close the transaction in late June, and we continue to be excited about the opportunities that, that acquisition will relay to us. And we believe that it will be good for us and our earnings per share accretion and tangible book earnback is all tracking along levels that we anticipated. We continue to look for additional opportunities, and we've had an increased number of deals that we're looking at and a number of deals that are being presented to us. We do still hope that through a strategic acquisition, we will be able to address some of our core funding challenges that we are having. And we do think that we will likely have several more opportunities forthcoming. We think part of the increase in activity is attributed to the increase in bank stocks since the election, and we think that there are a number of people that are contemplating both M&A from a purchase or a sell side as there's just been a higher number of inquiries. As we turn to capital, our tangible common equity at 3/31 was 8.55%, which compared to 8.31% last quarter and 8.58% a year ago. Tangible common equity grew at a higher pace than our asset growth, resulting in the aforementioned increase. At the present time, our tangible common equity is projected to decline slightly below 8% when the Capaha transaction is completed, which is at the lower end of our historical range of tangible common equity, and we will be monitoring that ratio closely. That concludes my prepared remarks, and I'd like to turn it over to Matt at this time.

Phil, if you would, at this time, just remind folks how they can queue for questions, and we'll be ready to take those.

[Operator Instructions] Our first question comes from Andrew Liesch of Sandler O'Neill.

Just a question on the rise in expenses. It sounds like a lot of this was maybe not planned but necessary. Is there any more hiring that you guys need to undertake?

We have filled basically most of the positions that we have opened. We have -- periodically, you'll have some turnovers that's unanticipated that may result in needing to replace staff. But by and large, I think our staff right now is at the levels that we desire it to be at.

Got you. And then the folks that were added, was this -- were they back office? Were they compliance staff? Were they producers? Just kind of curious on any sort of revenue opportunities from them.

We did add a Chief Credit Officer. The Chief Credit Officer that we did have on our team took our Risk Management Officer's role, and so we added another member to our executive management team. So we went from 5 executives to 6. And with that, this gentleman does have a lending background and a lending portfolio, and we would anticipate having a few credits that we would be looking at from his addition to our team. And he joined our staff in January.

Got you. And then could you just comment a bit further on what you're seeing on deposit costs? What is competition like in new markets? And are there any locations that are tougher or more competitive on the rate side?

We're reasonably pleased with how the markets reacted given the last couple of rate increases. We are running a few CD specials and trying to key a little bit of growth at this time, maybe ahead of a June rate increase. But it's not gotten out of hand the way we've seen maybe in the last up rate cycle. But we're still keeping our fingers crossed on that regard. Greg, anything in particular in any individual market?

Well, in each individual market, there's several people leading the charge in each market, of which we're not one of them. But it doesn't seem really isolated in 1 region over another. I'd just say it's fairly aggressive in each area but not anything untoward to what we have seen in other quarters.

[Operator Instructions] Okay. This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks.

Okay. Thank you again. We appreciate everyone's interest, and we'll talk to you in 3 months.

Thanks to you all. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.